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One of the games which is repeatedly used as an example in game theory is called the Prisoner’s Dilemma. In this game, two prisoners are caught and they are each given the choice to cooperate with each other or turn on each other. This game has been used to simulate various real life scenarios including many economical situations and in essence describe any un-trusted transaction between people.

In 1984, Robert Axelrod conducted an experiment in which he asked scientists to play in a tournament of repetitive prisoners dilemma with one another – by creating the repetition of the game Axelrod made it possible for people to adapt their strategies and also created a memory in the game such that each player plays the next iteration with the knowledge of the strategy his opponent played in the previous iteration.

The winning strategy was found to be “tit-for-tat”, which leads to a balance of cooperation between the two prisoners.

Axelrod then conducted another tournament where he disclosed the winning strategy. The surprising thing he found was that even though everyone knew the winning strategy, it still remained the winning strategy. So collaboration on the strategy did not affect the game in any way.

Another variation of the prisoner’s dilemma is called an assurance game and is most commonly known as “Hunt a Stag.” In this game, two hunters can choose to collaborate and hunt a Stag (large and tasty adult deer) or split and hunt a rabbit alone (smaller but just as tasty).  The difference between this game and the Prisoner’s Dilemma is that players are allowed to communicate and choose to collaborate.

So creating a proper mechanism for communication and trust between players is essential for collaboration.

One other commonly used game is called the tragedy of the common. This game is played by several players that share the same resources. In this game it has been shown that if the players act independently in their own best interest they would eventually deplete the resource, which is not in their long term best interest. Elinor Ostrum, a political scientist, has researched the matter looking at various communities around the world that share resources. She actually found that it’s true and that most communities have depleted their resources, which was not in their best interest. But she also found something else; there were many communities that didn’t deplete the common resources and managed to sustain a long-term preservation of these resources. By looking closely at communities that succeeded vs. communities that failed she discovered that communities that succeeded in preserving these resources managed to establish institutions for collective actions, and that collaboration was the main reason for the positive outcome.

Robert (Yisrael) Aumann and Thomas Schelling received the Nobel Prize in 2005 for their work on collaboration in games (“The tile of Aumann’s work is “Conflict and cooperation through the lens of game theory”) and addressed the question of which games would promote collaboration and why people chose to collaborate. Part of Aumann’s findings was that multi-player repetitive or infinite games promote cooperation between players because people learn to collaborate in time.

Another contributing factor to cooperation is introduced by some irrationality in the players, meaning that perfection and uniform thinking does not lead to collaboration. There is a need for some of the players to act differently than others given the same situation in order to promote collaboration or, as George S Patton described it, “If everyone is thinking alike, then somebody isn’t thinking.” — George S. Patton.

So if we look at all of these examples we can see that in multi player infinite games with some irrational behavior (like trading for example) sharing and collaboration are always in our best interest. In my mind we still haven’t begun to realize the true potential of collaboration and the payoffs it would yield but we can clearly identify that collaboration, in the eyes of game theory, leads to greater success.

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Be sure to read the full risk disclosure before trading Forex.  Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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This entry was posted on Thursday, March 5th, 2009 at 4:01 pm and is filed under Collaboration, Forex, Game Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.